Watchdog: Funny math used on AIG bailout

By Jennifer Liberto, senior writerNovember 14, 2010: 4:46 PM ET

WASHINGTON (CNNMoney.com) -- The Treasury Department changed its accounting style and produced an overly optimistic estimate of taxpayer losses in the AIG bailout, the special investigator for the federal bailouts said in a report released Monday.

Treasury disputes the inspector general's criticism, and says it was transparent in its calculations.

Special Inspector General Neil Barofsky's latest report to Congress also heaps new criticism on Treasury for taking credit for efforts to help homeowners with mortgages exceeding their home's value to secure modified loans.

Reporting directly to Congress, Barofsky reviews all the programs that came about via the original $700 billion Troubled Asset Relief Program (TARP) that Congress passed during the height of the financial crisis in October 2008.

While Treasury can no longer allocate any new money to the program since it expired, Barofsky reported that $178.4 billion in bailout funds have yet to be repaid. In addition, Treasury has another $80 billion that can still be spent under existing TARP programs.

"There's a lot of people saying TARP is dead, TARP is out of its misery," Barofsky said Monday in an exclusive interview with CNNMoney.com's Poppy Harlow. "But legally, there's another $80 billion dollars of TARP money that's obligated and still can be spent. . .We're looking at more money that's going to go out after Oct. 3rd than in the year previous," he added.

Critics of the program seized on the report as further evidence of a failed policy.

"This report calls into significant question the very credibility and competence of the Treasury Department," Darrell Issa, a Republican congressman from California who is the ranking member of the House Oversight Committee, said in a statement.

Earlier this month, Treasury reported that its new plan to extricate the government from American International Group (AIG, Fortune 500) would result in losses to taxpayers of around $5 billion, much less than the $45 billion that the agency reported in March.

While all the loss estimates were much lower than the $180 billion that the government had said it might be willing to commit to in order to prop up the insurer, Barofsky questioned Treasury's current accounting methodology on losses.

The report basically said Treasury's $5 billion loss estimate rests on market prices for common shares as of Oct. 1, without taking into account "volatility in AIG's stock price." The report accuses Treasury of changing its accounting practices to make the cost of the AIG bailout less eye-popping, without explaining that its methodology had changed.

"This conduct has left Treasury vulnerable to charges that it has manipulated its methodology for calculating losses," the report said.

However, Treasury said it was transparent in its October estimate, because it clearly stated the cost estimate assumed the final exit strategy for AIG would be completed.

The reason the October estimate diverged from Treasury's past calculations is that its recent estimate looks forward to when the government completes its exit strategy.

Right now, Treasury owns preferred shares, which are tougher to value, because they aren't traded and are not easily converted to cash, Millstein explained. Yet, the exit plan creates a way for the government to convert its preferred shares to common shares.

Treasury used the common share price in its recent report on AIG losses. SigTARP thinks they should have used preferred shares method to calculate its estimate.

When Treasury reports to the auditors, it will use both techniques to put a cost estimate on the AIG bailout, according to Treasury officials.

Issa criticized Treasury's October AIG bailout figure as a "betrayal of public trust," he said in a statement. And he asked Treasury to publish a new cost estimate on the AIG bailout, using the methodology that assumes Treasury still owns the preferred shares.

Help for homeowners

The inspector general's report also said Treasury took too much credit for helping homeowners who did not ultimately benefit from Treasury's Home Affordable Modification Program.

Treasury has said several times that its mortgage modification program has "helped" more than 1.3 million homeowners by reducing their monthly mortgage payments, calling each of these a "success," the report said.

However, Barofsky's team took issue with the level of success, saying more than 700,000 of the modifications ultimately failed and another 173,000 remained in limbo.

"They say for example that they've helped more than 1.3 million people through mortgage modifications, but more than half of those have failed," Barofsky said. "Then, they go and say, ' Well, each one of those had a significant benefit for the homeowner.' And that's just not true."

Treasury responded that the HAMP program is an important part of the administration's effort to stabilize the housing market and has "redefined the loan modification standard for the mortgage industry," said Treasury Acting Assistant Secretary Tim Massad.

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